Do Share Repurchases Facilitate Movement Towards Target Capital Structure? International Evidence

Abstract

We use a new international setting to test and strengthen the identification of “target leverage hypothesis” in the payout policy literature. We conduct a quasi-natural experiment induced by staggered share repurchase legalization in 17 economies and analyze its influences on leverage dynamics. Under-leveraged firms before legalization are more likely to buy back shares immediately after the law change, controlling for other repurchasing motives. Post-legalization repurchases also facilitate firms’ movement towards target leverage, especially for under-leveraged firms. This facilitating effect is stronger under less repurchasing restriction, higher dividend tax penalty, and lower financial constraint.

Keywords: Share repurchases, capital structure, target leverage

JEL Classification: G32, G35, G38